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(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidence from gasoline and cigarettes

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  • Alejandro Esteller-Moré

    ()
    (Universitat de Barcelona & IEB)

  • Leonzio Rizzo

    ()
    (Università di Ferrara & IEB)

Abstract

Besley and Rosen (1998) were the first authors to empirically estimate the presence of vertical tax externalities. They tested it on gasoline and tobacco unitary taxes. However, they did not take into account the difference in cost of living across states: high cost areas pay less in real terms than low cost areas, since the nominal unit tax on cigarettes and gasoline does not differ according to the state in which it is applied. Consequently, we propose that vertical tax competition can be estimated by deflating all financial variables using the House Price Index (HPI), which is disaggregated by states. This produces a federal tax variable that is expressed in real terms and shows cross-sectional variation. This empirical strategy enabled us to disentangle the vertical interdependence between state and federal tax rates from aggregate shocks over time, using US data from 1975 to 2006 on gasoline and tobacco. We found significant horizontal tax competition, which was higher for cigarettes, but no vertical tax reaction. The results were robust to the period analyzed.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/24.

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Length: 32 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/10/doc2009-24

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Keywords: vertical externality; aggregate shock; tax rate; deflator;

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References

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Citations

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Cited by:
  1. Alejandro Esteller-Moré & Leonzio Rizzo, 2010. "Politics or mobility? Evidence from us excise taxation," Working Papers 2010/3, Institut d'Economia de Barcelona (IEB).
  2. Leonzio Rizzo & Alejandro Esteller - Moré, 2011. "US Excise Tax Horizontal Interdependence: Yardstick vs. Tax Competition," Working Papers 201116, University of Ferrara, Department of Economics.
  3. Esteller-Moré, Alejandro & Galmarini, Umberto & Rizzo, Leonzio, 2012. "Vertical tax competition and consumption externalities in a federation with lobbying," Journal of Public Economics, Elsevier, vol. 96(3), pages 295-305.

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